Equal Pay Victory for Employees: Employers May Not Use Prior Salary to Justify a Wage Differential Between Male and Female Employees

On April 9, 2018, just one day before National Equal Pay Day, the Ninth Circuit Court of Appeals determined en banc that employers may not escape liability under the federal Equal Pay Act—which prohibits employers from paying employees differently on the basis of sex—by considering an employee's prior salary (either alone or in combination with other factors) in setting compensation. The case is Rizo v. Yovino, and can be found here.

The Court's ruling overruled long-standing precedent that an employee's prior salary was a "factor other than sex" under the Equal Pay Act, and that an employer may consider an employee's prior salary along with other factors—such as ability, education, and experience—in setting the employee's compensation.

While Oregon and Washington employers are likely already planning to review their compensation practices in preparation for the effective dates of the Oregon Pay Equity Act (the majority of which becomes effective January 1, 2019) and the Washington Gender Equal Pay Act Amendments (which become effective June 7, 2018), the Court's ruling provides yet another compelling reason to review compensation practices to avoid potential litigation.

The Law Before April 9, 2018: An Employee's Prior Salary Is a "Factor Other Than Sex" That an Employer May Consider in Setting Compensation

More than 25 years ago, the Court determined that an insurance company could consider its employees' prior salary to determine their wages without violating the Equal Pay Act. Kouba v. Allstate Ins. Co., 691 F2d 873 (9th Cir 1982).  

The plaintiff-employee in Kouba challenged Allstate's practice for considering new insurance agents' prior salary—along with their ability, education, and experience—in calculating their minimum guaranteed salary, the result of which was that, on average, female agents earned less than their male counterparts. In response, Allstate argued that an individual's prior salary is a "factor other than sex," and that a statutory exception to the Equal Pay Act applied.

The trial court sided with the employee, concluding that the historical pay disparity between men and women created a presumption that a female insurance agent's prior salary was based on gender, and that Allstate failed to rebut that presumption.

But the Ninth Circuit reversed, holding that "the Equal Pay Act does not impose a strict prohibition against the use of prior salary." The Court shared the trial court's concerns that an employer "might manipulate its use of prior salary to underpay female employees," and even recognized the risk of gender discrimination presented by considering prior salary:

"Even with a business-related requirement, an employer might assert some business reason as a pretext for a discriminatory objective. This possibility is especially great with a factor like prior salary[,] which can easily be used to capitalize on the unfairly low salaries historically paid to women."

Nevertheless, the Court remanded the case to the trial court for a determination whether Allstate's business reasons for considering an employee's prior salary could reasonably explain its use of that factor.

The Law Now: Employers May Not Consider an Employee's Prior Salary in Setting Compensation

In Rizo, the Court expressly overruled Kouba, holding that an employer may not use prior salary to justify a wage differential between male and female employees. In strong language, the Court recognized that "[a]lthough the [Equal Pay] Act has prohibited sex-based wage discrimination for more than fifty years, the financial exploitation of working women embodied by the gender pay gap continues to be an embarrassing reality of our economy," and that allowing employers to "capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum[] would be contrary to the text and history of the Equal Pay Act."

The parties did not dispute the key underlying facts that (1) the Fresno County Office of Education (the "County") paid the plaintiff—a newly hired female math consultant—less than her similarly situated male counterparts, and (2) the County determined the starting salaries of its new employees by taking their prior salaries from their former employers, adding 5 percent, and placing them on the corresponding step of the County's salary schedule.

As in Kouba, the trial court sided with the employee, concluding that "a pay structure based exclusively on prior wages is so inherently fraught with the risk—indeed, here, the virtual certainty—that it will perpetuate a discriminatory wage disparity between men and women that it cannot stand." On appeal, a three-member panel of the Court determined that Kouba controlled, and that an employee's prior salary constitutes a "factor other than sex" under the Equal Pay Act. The plaintiff petitioned the Court for a rehearing en banc,^[1] and the Court accepted the petition.

On rehearing, the Court discussed how the Equal Pay Act "creates a type of strict liability" for employers that pay similarly situated male and female employees differently: an employee need only demonstrate a wage disparity; he or she does not need to demonstrate that the employer acted with discriminatory intent. Once the employee establishes the wage disparity, the employer must establish that one of the Equal Pay Act's four statutory exceptions applies—namely, that the pay disparity in fact resulted from (1) a seniority system, (2) a merit system, (3) a system that measures earnings by quantity or quality of production, or (4) a factor other than sex.

In holding that the fourth factor "is limited to legitimate, job-related factors such as a prospective employee's experience, educational background, ability, or prior job performance," and that it could not include an employee's prior salary, a six-judge majority of the Court determined that "[i]t is inconceivable that Congress, in an Act the primary purpose of which was to eliminate long-existing 'endemic' sex-based wage disparities, would create an exception for basing new hires' salaries on those very disparities—disparities that Congress declared are not only related to sex but caused by sex."

But the Court stopped short of announcing a general rule that an employee's prior salary is strictly taboo under all circumstances: for example, the Court did not decide "whether or under what circumstances[] past salary may play a role in the course of an individualized salary negotiation," leaving that question for other courts to tackle.

Along with the opinion of the six-member majority, the Rizo case included three concurring opinions. Although the entire panel concluded that the County's practice of considering only an employee's prior salary in setting initial salary ran afoul of the Equal Pay Act, four of the concurring judges expressed concerns that the majority went too far in holding that an employer may never consider prior pay in setting an employee's initial salary. Another judge who filed a separate concurrence believed that past pay could constitute a "factor other than sex," but only if the employer could demonstrate that the employee's prior pay was not tainted by sex discrimination.

Is Rizo Here to Stay?

Time will tell, but the Rizo case certainly appears to be a candidate for appeal to the United States Supreme Court given that (1) the case involved a practice of considering only prior salary (rather than considering prior salary along with other factors), and (2) according to one of the concurring opinions, at least four other circuit courts of appeal have determined that while an employer may not consider prior salary alone, it may consider prior salary along with other factors to justify a pay disparity. The United States Supreme Court typically agrees to hear cases that have national significance, and in light of the apparent conflict between the Rizo case and decisions of other circuit courts of appeal, it would not be surprising for the Supreme Court to accept review of the case. But until then . . .

What Should Employers Do Now?

Unless and until the Supreme Court overrules Rizo, it is the law of the land in the states and territories that make up the Ninth Circuit.^[2] Accordingly, employers should review their compensation practices to ensure that they do not consider an employee's prior salary in setting compensation either alone or in combination with other factors. During that review, Oregon and Washington employers should also consider reviewing other compensation practices to ensure compliance with those states' respective state pay equity acts.^[3] And if employers consider prior salary in contexts other than setting initial compensation—for example, if prior salary is considered in individualized salary negotiations—they should tread with caution: although the Court left that question for another day, it is possible that other uses of an employee's prior salary could run afoul of the Equal Pay Act.

If you have questions about compensation practices, please contact an attorney on Miller Nash Graham & Dunn's Employment Law and Labor Relations Team.